A non-warrantable condo is one that does not meet the requirements of most conventional (Fannie, Freddie, and jumbo) lenders, and is thus ineligible for the most competitive financing options.
To be “warrantable,” a condo must meet a long series of requirements set out by Fannie, Freddie, and jumbo lenders.
I list many of those requirements in my “11 Condo Considerations” (copied below) that every buyer and agent should be aware of when condo shopping – because they significantly affect both values and financing options.
The title of my blog has the word “DANGER” in it precisely b/c buyers sometimes enter into contract for non-warrantable condos – either unaware that they are non-warrantable or unaware of the implications. (“DANGER” also makes for nice clickbait 😊).
NON-WARRANTABLE FINANCING OPTIONS
There are myriad financing options for non-warrantable condos… but NONE of them are as competitive as conventional financing (or even close).
Non-QM Lenders/High Rates/Large Down Payment: Non-QM lenders are today’s version of “subprime lending” but with more safety nets. These lenders will finance non-warrantable condos, but they require large down payments (20% to 25%, depending on issues and borrower-strength) and the rates are 2% to 4% higher than standard conventional rates. For strong borrowers and “less severe” condo issues, there are some 10% down options.
Local/Regional Banks: There are also local banks that offer financing for non-warrantable condos – but they too require large down payments (often 25%) and they typically offer only adjustable rate mortgages (such as 7 year ARMs) as well. Rates, however, tend to be much closer to standard conventional rates.
Buyers with limited down payment funds (under 20%) are most at risk when trying to buy non-warrantable condos.
Their options are very limited, unless the condo issues are mild and the buyer is very strong from a credit and income perspective, as I mention above.
For example, we recently tried to help a 10%-down buyer in need of non-warrantable condo financing, but he was ineligible for 10% down financing of any type because the condo’s major issue was the lack of sales in the new condo project – it did not meet the “50% sold or pre-sold” requirement shown as item #11 below.
11 CONDO CONSIDERATIONS
Below are 11 things buyers and agents should consider if they plan to finance the purchase of a condo.
Concentration Rule. No single entity/person can own over 20% of the units in the complex. Prior to 2018, it was 10%.
Commercial Use. No more than 35% of the square footage of the entire complex can be “commercial.” Prior to 2018, the limit was 25%.
Owner Occupancy Ratios. Owner Occupancy is irrelevant if a buyer intends to occupy the unit. It must be over 50%, however, if the buyer is an investor.
Rates Are Higher. Condo financing has higher interest rates if the LTV is over 75%.
HOA Delinquencies. No more than 15% of the units can be more than 60 days delinquent with HOA dues. This is rarely an issue these days, but it often surfaces during real estate downturns (it was a common issue from 2009 – 2012, for example).
Litigation. Litigation involving the HOA is usually a deal-killer, but not always if it is minor or doesn’t affect the subject unit. We need to review the actual litigation/complaint. We can also use a non-Fannie or non-QM lender, but the interest rate and down payment requirement will both be higher.
FHA/VA Approval. Entire condo complexes need to be FHA or VA approved before FHA or VA financing can be used to finance a unit, in most cases. You can find FHA’s list of approved complexes here, and you can find VA’s list here.
3% Down. This is a reminder that we offer 3% down financing for condos up to loan amounts of $726,200. This is a great alternative to FHA financing but guidelines are much stricter. For “High Balance” loans (from $726,200 to $1,089,300), the minimum down payment is 5%.
Is It a Condo or a PUD? This is a reminder that you can’t tell simply by looking at a unit. You need to check the zoning. If the unit does not touch the ground it is very likely a condo. But if it does touch the ground, it could either be a PUD/townhome or a condo. PUD/townhomes are not subject to any of the condo restrictions.
HOA Dues. Lenders need to know exactly what they are b/c they are much higher nowadays than in the past and they significantly impact qualifications.
50% of Units Pre-Sold or Sold. For newly constructed condos, at least 50% of the units in the project or just “the phase” must be under contract or sold – to either owner-occupants or 2nd home buyers (but not to investors).
